Vintage turn from biggest retailer

Woolworths investors must have had a sense of deja vu when Australia’s largest retailer released its 2010 profit results yesterday.

The double-digit profit growth and record dividend, capped off with a $700 million off-market buy back, were vintage Woolworths.

Woolworths has handed about $6.4 billion to its shareholders over the last nine years. Yesterday’s buy-back, coupled with the $325 million buy-back earlier this year, will take total payouts to $8.8 billion.

Some will see the buy-backs as a sign that Woolworths is running out of growth options after 11 years of double digit profit growth.

What the buy-back shows, however, is that Woolworths is still generating so much cash it can afford to reward shareholders to the tune of more than $2 billion this year, take on Bunnings in the $40 billion hardware sector, invest another $1.5 billion in capital into new stores, refurbishments and supply chain improvements, while keeping an eye out for acquisitions.

Chief executive Michael Luscombe has ruled out a bid for Carrefour’s supermarkets assets in Asia, saying they lack market power and are of more value to players such as Tesco and Dairy Farm.

However, he says there’s no shortage of acquisition opportunities locally and offshore and Woolworths is constantly being approached by hopeful merchant bankers.

The biggest opportunity for Woolworths lies within its existing businesses.

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Not only was the buy-back vintage Woolworths, so too was the way it achieved 9.5 per cent growth in earnings before interest and tax, which exceeded $3 billion for the first time.

Gross margins in Australian food and liquor rose from 24.05 per cent to 24.51 per cent as Woolworths sourced more product offshore, taking advantage of the strong $A, reduced shrinkage and expanded its private label range.

Gross margins would have been higher if Woolworths had not reduced the prices of almost 5,000 grocery products, something it intends to do again this year.

Cost of doing business in Australian supermarkets fell slightly as Woolworths dug deeper for cost savings in the face of low food price inflation and net margins rose from 5.97 per cent to 6.45 per cent.

Woolworths’ return on funds employed fell slightly, from 31.9 per cent to 31.0 per cent -- going against the longer term trend.

This reflected two things - heavy investment in stores over the last year as Woolworths tried to retain its lead over Coles and higher than normal levels of property investment.

Luscombe is satisfied that Woolworths is achieving a satisfactory return on the $4 billion it has invested in the business over the last three years.

Woolworths is now preparing to go back to the future by undertaking another round of supply chain restructuring and cost-cutting.

Luscombe says the project, dubbed Quantum, could deliver similar benefits to projects Refresh and Mercury, which helped reduce Woolworths’ costs by more than $2 billion between 2000 and 2008.

“It’s very much about making sure we buy as well as we can, both the product we sell and the product we use," he says. “It’s about doing things once and as efficiently as possible as a whole group, looking at our assets and making sure we leverage them for the entire group and that we try not to duplicate things," he said.